Working Paper No. 10-12:
Consumer Use and Government Regulation of Title Pledge Lending


Todd Zywicki

Date Posted: February 2010

Abstract (below) | Full text (most recent) on SSRN


Recent years have seen growth in the use of certain types of nontraditional lending products, such as payday lending and auto title lending, and a relative decline of others, such as finance companies and pawnbrokers. Congress is currently considering major new regulations on short-term lending products, such as title lending, that could produce their demise - even though there is no evidence that such products were related in any way to the financial crisis.

This study examines the question of who uses title pledge lending and why. The results are surprising. I find that title pledge lending is used predominantly by three distinct subgroups of borrowers: First, moderate-income borrowers with impaired credit who are excluded from superior credit products such as credit cards and who use title pledge lending in preference to payday loans (the next-closest alternative). Second, unbanked consumers, often immigrants, who are unable to access other credit products (especially payday loans) because access to more mainstream credit products requires having a bank account. Third, independent small businesses such as those who run a landscaping or handyman business who use title pledge loans as a source of working capital. Each of these three groups of borrowers use title loans for very different purposes and raise very different questions as a matter of regulatory policy. Yet current regulatory policy, and proposed new regulations by Congress, treat them all with a one-size-fits-all form of regulation.

Ill-fitting one-size-fits-all regulation of title pledge lending could have severe negative consequences for consumers. By making this particular form of credit less available or more expensive, poorly conceived regulation could force many borrowers to greater use of less preferred types of credit, such as payday loans or pawnshops, greater use of products that are inappropriate for their situation, such as credit cards, or even increased use of illegal loan sharks. Greater regulation may also interfere with the simple pricing structure of title pledge loans, which is one major appeal of the product to many customers. Finally, by drying up an important source of short-term working capital for small, independent businesses, regulation could stifle entrepreneurship and economic recovery.